Low Prices Lead To Layoffs In The Oil Patch

Crude oil is set to close out a shocking year with a fresh five-year price low in the final days of 2014, falling more than 50 percent from their June highs.

The decline continues to bedevil the markets. Sensing a rally was in order, speculators had dumped money into energy stocks throughout the month of December, hoping to buy up positions at basement prices. But Bloomberg reports that long positions in West Texas Intermediate declined by the most since August for the week ending on December 23, an indication that the markets have lost confidence in a swift rebound for oil prices.

This portends a longer period of low oil prices, and with that, a cutback in drilling and job losses in the U.S. oil patch. Baker Hughes reported that the rig count took another significant hit in the week ending on December 29, falling by 35 to a total of 1,840 oil and gas rigs in operation. Across the country, exploration companies are slashing their capital expenditures for the coming year to reflect the poor price environment.

That is going to have an impact on employment. In a recent example, American Eagle Energy, a small oil producer in North Dakota, decided to call off drilling entirely until oil prices rebound.

Less drilling will not only lead to a loss of jobs for oil workers, but the services that pop up around drilling sites – restaurants, bars, construction, and more – are feeling the slowdown as well.

In one example recently reported by Bloomberg, a private club in Williston, North Dakota has been shuttered because it failed to pay rent. “The Bakken Club,” which offered exclusive services including fine dining, airport shuttling, and corporate events, was a place where “like-minded individuals can further their business relationships.” Memberships ranged from $5000 to $25,000. Unfortunately for The Bakken Club, such lavish living becomes harder to maintain when oil prices crash.

But it won’t just be the profligate that feel the brunt of a depressed oil market. Civeo, a Houston-based company that builds lodging for oil workers, announced on December 29 that it would cut its workforce by 45 percent because of lower demand for “man camp” trailers.

According to an assessment from the Federal Reserve Bank of Dallas, an estimated 250,000 jobs across eight U.S. states could be lost in 2015 if oil prices don’t rise. More than 50 percent of those job losses would occur in Texas, which leads the nation in oil production.

There are some early signs that a slowdown in drilling could spread to the manufacturing sector in Texas. Companies have sprung up during the shale boom to build metal, machinery, pipes, electrical equipment, chemicals, and other support services. But with the drilling climate taking a turn for the worse, manufactures are starting to feel the chill as well.

The Dallas Fed reported a decline in new orders in a key manufacturing survey. One executive at a metal manufacturing company said in the survey, “the drop in crude oil prices is going to make things ugly… quickly.” Another company that manufactures machinery told the Dallas Fed, “Low oil prices will drive reductions in U.S. drilling rigs, which will in turn reduce the market for our products.”

The sentiment was similar for a chemical manufacturer, who said “lower oil prices will adversely impact margins. Energy volatility will cause our customers to keep inventories tight.”

States like Texas, North Dakota, Oklahoma, and Louisiana have seen their economies boom over the last few years as oil production surged. But the sector is now deflating, leaving gashes in employment rolls and state budgets.

With such extensive dependence on oil for prosperity in these states, the pain will mount if oil prices stay low.

My heart aches for those wage earners whose livelihoods have been destroyed by the economic war among billionaires. I know. I lived through the lay offs of tens of thousands of highly talented engineers in nuclear power and coal fired power plants.

A brilliant engineer, a Valedictorian of his college, left my office went home and put a 38 in his mouth and blew his brains out. An Assistant Chief Engineer, in charge of hundreds of Professional Engineers, became a janitor. His wife had MS and the church extended benefits to a man with no job prospects. The genius who invented most of the pollution technologies in America ran a dude ranch, wangled mules.

But I never recall one article, one mention on the nightly news, one speech on Capitol hill, on the real consequences to our fouled up energy policy. It carries a huge cost.

bob on January 03 2015 said:

What would you consider a rationale energy policy?

mulp on January 05 2015 said:

An energy policy where costs were determined purely by labor costs with zero economic profit involved because there was no resources to monopolize to generate the profits.

Example would be energy based on wind and solar and batteries where all the cost is in the labor to build, maintain, and operate the capital assets that can be added to with additional labor so monopoly profits are impossible.

Fossil fuels depend on gaining access to land with fossil fuel capital assets which are burned to produce profits, with ideally as little labor involved as possible. Ideally, the land and environment is pillaged and plundered to generate profit with out labor costs so the land is totally destroyed of its value. Mountain top removal valley fill is an example of taking productive woodland and turning it in a decade into wasteland that will require centuries to recover. The Gulf Coast area of the Mississippi delta is being devastated as a fishery and buffer for the inland area by the cheap labor cost policies of energy - better that 10% of Louisiana become ocean than $1 per barrel in added labor cost be paid to prevent it.

The fossil fuel industry is labor "saving" not job creating. When labor was in short supply because farming was labor intensive and required 50% of the work force or more provide food for the other half, fossil fuels allowed industrialization to build capital assets that provided mechanization to farming, reducing the labor for food and other ag products to 10% of the labor force.

Now labor is in excess and much is idle, so now is the time to employ labor to build wind and solar harvesting and build the energy granaries to store the harvest to provide a steady supply of energy. And all capital depreciates in value, a mandate of entropy, from wear and tear and stress, so labor becomes a constant input replacing the assets constantly establishing a direct labor cost relationship to energy costs which will not vary much from boom to bust.

And the sun which drives the solar and wind power is not going to run out in a thousand lifetimes while coal and oil mining will never last a lifetime before one must grab more land to pillage and plunder.

Steve on January 05 2015 said:

Isnt it time for Canada and the USA to fix prices on oil, say 85 dollars and set production and export quotas? We cant let the free market destroy half or more of the industry. Too much has been invested in it. Buying cheap Saudi oil is not in our best interest. Look what buying cheap Chinese goods did to manufacturing in our countries.

David on January 13 2015 said:

Steve, is this where free market economics fails us? Consveratives love to praise captialist ideals, yet here we are talking about partially socializing the O/G industry and setting production/export quotas. I'm not trying to pick a fight, as I'm in agreeance with you.